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Auto and Auto Supplier stocks have risen sharply over the past 30 days – Driven by evidence of liquidity from both the Fed and Private Capital Markets, signs of bottoming for Auto Demand, and indications that Auto Production is poised to resume. For the near term, we believe that newsflow could remain broadly supportive. The mechanics of SAAR calcs could lead to (perhaps misleadingly) strong SAARs in the months ahead. And we believe that tightening of new and used car inventory could support some improvement in pricing.
In a report out today, we explore the level of cash burn while US facilities are not operating. Bottom-line is Tesla has plenty of liquidity to withstand a 6+ month shutdown…far beyond what we think is likely. We also take a stab at revised estimates, which assume that a weakened consumer leads to lower volumes, although we see several reasons that Tesla volumes will hold up better than most.
The breadth and slope of the decline in global economic activity post COVID-19 is unprecedented. For Autos, while there is still relatively little visibility into the intermediate term outlook, there is a growing view within the Industry that the pattern of declines globally will mirror that which was experienced in China. We’ve been seeing this in Europe. And our contacts suggest that a similar pattern is emerging in the U.S. We are lowering our Global Auto Production forecast for 2020 to -20%. Embedded within this is a U.S. Light Vehicle Sales assumption of 12 million (down from 17 million in 2019), in-line with the 10-12 million unit “guestimate” that we’ve heard from Industry contacts.
We wanted to flag a few highlights in today's (03/19/20) Wolfe Research Auto Daily....
In our Game-Plan for a Downturn report we re-cast estimates to reflect a 10% Global Downturn (which would put global Auto Sales 16% below the 2017 peak), and then examined the multiples that companies are trading at against this number. Our finding was that ALV, BWA, DAN, LEA, and ST are trading below historical average multiples against these downturn numbers. TEL, APTV, and MGA are trading relatively close to historical average multiples but against downturn numbers. We use this metric as a guide for determining the level of downside that each stock is pricing in.
The most common question that our team has been getting… every day… is “Where do these Auto stocks typically bottom”... We wish that there was a compelling answer… but the reality is that in a deep downturn we’ve seen exceedingly low multiples applied to trough EBITDAs, earnings, or free cash flows, largely because in the midst of the decline, Investors lack confidence that numbers won’t get worse. The catalyst for an Autos inflection typically comes from a signal that a floor or an inflection is near.
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